(Photo: STR / AFP)
(Photo: STR / AFP)

Goldilocks view of world economy faces return of trade bear

  • The tariff warning followed weeks of a steady drum-beat of reports indicating that the world’s two largest economies were resolving their differences on trade
  • Goldman Sachs still thinks an increase in tariff will be narrowly avoided, it also warned that higher duties would hit hard

HONG KONG : With American job gains powering ahead, signs of stabilization in China and subdued inflation keeping the lid on monetary tightening, all the latest signs were pointing to a return of Goldilocks conditions for the global economy. At least, until midday Sunday in Washington.

The latest threat by US President Donald Trump to jack up tariffs on Chinese goods could upset the “not too hot, not too cold" conditions that recently propelled both stocks and bonds around the world. The durability of the equity rally is now in question, with shares tumbling across Asia and US equity futures sliding.

Analyst teams at Bank of America Corp., Citigroup Inc. and Unicredit SpA had all published research notes flagging the chances of a Goldilocks return in the run-up to the Trump tweets. Now the danger is that saber-rattling on trade will escalate again, as the US negotiations loom with the European Union and Japan, along with a decision on car tariffs.

“It’s going to mean that investors will be very focused on the trade issues even beyond China,' Joyce Chang, chair of global research at JPMorgan Chase & Co., said in an interview. “That’s what’s going to actually move the markets even more than some of the other issues that have been in play and in discussion last week -- like the Fed," she said.

The tariff warning followed weeks of a steady drum-beat of reports indicating that the world’s two largest economies were resolving their differences on trade. Expectations were rising that a deal would be struck during the upcoming round in Washington, with a high-level Chinese delegation due on Wednesday.

Trade has yet to recover fully from the pall cast by the escalation in tariffs last year, with key export economies from the euro area to Japan and South Korea still struggling. Any renewal in tensions could wreck the outlook for an upturn.

Goldman Sachs Group Inc. sees a 40% chance that Trump will, as threatened, raise tariffs on $200 billion worth of Chinese goods to 25% from 10%. While the US bank still thinks an increase will be narrowly avoided, it also warned that higher duties would hit hard.

“It’s the uncertainty effect that’s the big issue here," Andrew Tilton, chief Asia Pacific economist in Hong Kong, told Bloomberg Television. “Clearly this raises the specter of a significant hit to growth should these tariffs escalate and should the uncertainty associated with that weigh on investment going forward."

The Trump tweets on Sunday came just two days after an April US employment report that was the embodiment of Goldilocks. Payroll growth surged, while wage gains were slightly cooler than projected, suggesting the healthy American labor market could keep supporting the expansion without sparking inflation.

Investors barely had a chance to enjoy the porridge before the bears were knocking on the door again. Futures on the S&P 500 index were down 2% as of 11:41 am in Hong Kong.

This story has been published from a wire agency feed without modifications to the text.

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